Economic Aspects of Taxation
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Transcript of Economic Aspects of Taxation
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Economic Aspects of Taxation
Ch 16
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Principles of Taxation
the benefits approach
and the ability-to-pay approach.
The underlying question here is, whoshould pay, and who should pay the
largest amount.
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benefits approach
we would tax people in proportion to the
benefit they receive from government
pr
ogr
ams. This may work
well for
thingslike state parks orhighways.
those who use the parks might pay a
largershare of theirupkeep
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the ability-to-pay approach
we would tax people in proportion to their
income orwealth.
The higher the income orwealth, the higher the
taxes.
Some individuals would be paying forprograms
and services that they would neverneed to take
advantage of. the notion of fairness involves redistribution of
resources within the system.
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issues of fairness
the notions ofhorizontaland verticalequity
Horizontal equityimplies that people who
are viewed as equal should he taxed
equally. Vertical equityrelates to the tax treatment
of people with different levels of income.
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Progressive, proportional and
reg
ressive tax
Taxes areprogressive if they take larger
proportions of higher incomes and
regressive if they tak
e smallerpor
tions ofhigher incomes.
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Progressive, Proportional, and
Regressive Taxes
Chapter 16
Figure 16-4
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Chapter 16
Table 16-4
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Direct vs. indirect tax
direct(levied directly upon individuals orfirms)
indirect(levied on goods and services, andhence only indirectly on individuals orfirms who consume those goods and
services).
example of a direct tax is the personalincome tax; an example of an indirect taxis a gasoline tax.
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Federal Taxation
The federal government raises most of its
revenue from individual and corporate
income taxes.
Other federal taxes include sales and
excise taxes, payroll taxes, and corporate
profits taxes.
.
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Sales and excise
Taxes
Sales and excise taxes are levied as a
percentage of sales orperunit of an item
purchased;
these are controversial because they appear tobe regressive.
Because poorerpeople tend to spend larger
por
tions of their
income on consumption goods,they tend to pay a largerportion of their income
as sales taxes.
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corporate profits taxes;
Corporations must pay corporate profits
taxes;
these are controversial in the sense thatthey provide disincentives forcorporate
investment.
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Payroll taxes
Payroll taxes are collected to pay forsocialinsurance programs. So its proportional.
Payroll tax generally refers to two kinds of
taxes: Taxes which employers are required towithhold from employees' pay, also known aswithholding, Pay-As-You-Earn (PAYE) orPay-
As-You-Go (PAYG) tax;
or taxes directly related to employing a workerpaid from the employer's own funds (privatedriver, maid: these may be either fixed chargesorproportionally linked to an employee's pay.
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Chapter 16
Table 16-3
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Local governments( state, town, city)
Local governments employ property taxes most
heavily.
In fact, approximately 30 percent of the total
revenues of state and local government areraised through property taxes.
(Henry George would he pleased to hear this!)
States rely on sales taxes and, in some cases,income taxes.
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States and Localities Rely on
Transfers and Indirect Taxes
Chapter 16
Figure 16-6
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an efficient use ofresources?
Taxes have incentive effects and hence
alter the behaviorof market agents.
example, higher
income taxrateseffectively lowerwage rates forworkers.
substitution effects, and income effects.
Exemptions in the taxrate exist fo
rhomemortgage interest, giving people an
incentive to invest in housing markets.
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Response of Work to Taxes Depends on
Shape of Supply Curve
Chapter 16
Figure 16-7
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History of Top Marginal Tax Rate
in the United States
Chapter 16
Figure 16-5
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which goods and services can be taxed
most efficiently
The Ramsey tax rule states that the
government should levy the heaviest taxes
on those inputs and outputs that are most
price-inelastic in supply ordemand.
This will result in the smallestchange in
quantity exchanged across the market and
will generate the greatestamount ofrevenue for the government
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Efficiency vs. fairness
However, remember that the types of
goods that tend to have the most inelastic
demands are necessities;
increasing taxes on food, fuel, water, etc.
might be worrisome on the grounds of
equity.
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The thorny problem of tax
incidence
Questions of incidence ask who pays specific
taxes in the form of decreased purchasing
power.
They are related to questions about the degreeto which various taxes create disincentives for
people to work harderand/orsave more.
The benefit of transfers programs tends to offset
regressive treatment of low-income taxpayers.
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Who Pays the Taxes and
Who Benefits from Transfers?
Chapter 16
Figure 16-8
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The LafferCurve
Chapter 16
Figure 16-9
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Chapter 16
Table 16-2
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Chapter 16
Table 16-5